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Spheres of influence: the return of history?

13 Mar 2017

As the US, Russia and China reposition themselves on the world stage, Cold War-style spheres of influence are coming to define the new global order.

4 minute read

In February 1945, with the end of the Second World War in sight, British Prime Minister Winston Churchill, US President Franklin D. Roosevelt and Soviet Premier Joseph Stalin convened in the Livadia Palace in Yalta, a Russian resort town on the Crimean peninsula, to discuss the terms of the peace.

Following the Yalta Conference, the great powers ceded each other vast supranational territories where they operated more or less unopposed. And the Cold War order largely held until the demise of the USSR in 1991, when the demise of communism brought about what Francis Fukuyama called the ‘end of history’: the triumph of the US liberal model and an open, market-orientated international system underpinned by American security guarantees.

Fast forward three decades, and history appears to have started up again. The US has a new president in Donald Trump, who espouses a protectionist and isolationist worldview, while Russia and China are growing increasingly assertive under their respective leaders Vladimir Putin and Xi Jinping. The phrase ‘spheres of influence’ is once again on the lips of foreign policy experts.

“The world is not relentlessly moving towards plural liberal politics and open markets, it is moving in a rather different direction,” according to John Sawers, British diplomat and former chief of the Secret Intelligence Service (MI6), speaking at the Aviva Investors ‘Investing for Outcomes’ conference in London in November 2016. “We are moving from a world which, in the 1990s, was increasingly Western dominated…towards spheres of influence.”

In the absence of the unwritten rules that prevailed during détente, the transition to a new global order could be fraught with danger. So where could potential flashpoints arise? And what are the economic and financial implications of these geopolitical shifts?

Russia: weakness and strength

If the current Big Three of Trump, Putin and Xi staged a new Yalta conference to thrash out the terms of the international order, they would be entering contested territory. In March 2014, Russian troops annexed the Crimean peninsula following the ousting of Viktor Yanukovych, Ukraine’s pro-Russian president.

Russia’s actions in Ukraine demonstrate how a sphere of influence is about more than just military might. As with Georgia – which Russia invaded under then-president Dmitry Medvedev in 2008 – Moscow has long regarded Ukraine as part of its domain because of its longstanding historical, cultural and linguistic connections with the country.

Russia may be tempted to make further incursions into Eastern Europe, perhaps in the Baltic States. During his election campaign, Trump questioned whether the US should risk “World War Three” by honouring NATO’s principle of collective defence.1 Compare the stance adopted by then-Secretary of State Condoleezza Rice during the Georgia crisis of 2008; Rice condemned Russia’s attempts to “consign sovereign nations and free peoples to some archaic sphere of influence”.2

But a period of nervy détente is more likely than outright conflict. Analysts expect the Trump administration to drop US opposition to the annexation of Crimea – without formally recognising it as a part of Russia – while continuing to stand by the Baltic States. James Mattis, the new US defence secretary, affirmed Washington’s “unshakeable commitment” to NATO in a call with his British counterpart Michael Fallon on January 23, according to a Pentagon statement.

Trump and Putin may be able to defuse any potential standoff. Whether or not Putin orchestrated the hacking of the Democratic National Committee’s emails server during the US election campaign, there seems little doubt Trump was the Kremlin’s preferred candidate. Where Hillary Clinton is hawkish on Russia, Trump has spoken of opportunities to work with Moscow on strategic objectives, such as military action against Isis in Syria and the wider Middle East.

The appointment of Rex Tillerson, former CEO of ExxonMobil, as Secretary of State may also contribute to more cordial relations with Russia. Tillerson professes “a very close relationship” with Putin, whom he met numerous times while negotiating deals on behalf of ExxonMobil in Russia. 3

But Moscow remains wary of Trump – and some of his policies may not be conducive to Russian interests. The US president has promised to support America’s native shale gas industry, for example. A surge in US supply could force down global energy prices and eat into Russia’s market share, potentially damaging a vital source of revenue for the Russian state.

China: geopolitics and trade

Unlike Russia, China has a robust economy and prefers to project its influence through commercial means. Where it does deploy its military, as on the vast artificial sandbanks it has created in the South China Sea, it appears more interested in defending its own borders than making territorial incursions. China feels threatened by the build-up of US military forces in the region following Obama’s pivot to Asia.

However, China is unlikely to wage revanchist wars. Beijing already expends a great deal of money, time and effort enforcing domestic security. Where China does seek to project its influence, it relies on its economic clout; the so-called ‘One Belt One Road’ infrastructure investment initiative in Central Asia and its equivalent in Southeast Asia, the ‘Maritime Silk Road’, are good examples of this strategy.

China is expanding its authority through trade and investment at just the time when the US is enacting protectionist policies. On January 23, President Trump signed an executive order that formally withdrew the US from the Trans-Pacific Partnership (TPP). Trump has also accused China of devaluing its currency to hurt US exporters. Meanwhile, Xi has been increasingly vociferous in his defence of trade and globalisation.

But while China is taking steps to secure its economic leadership in the region, it has not demonstrated it is willing to use its burgeoning military power to guarantee security and preserve the status quo. With Trump threatening to pull US forces from the region unless his allies contribute more to their own security, East Asia could face a power vacuum.

Ironically, Trump’s isolationism may not necessarily be welcomed by Xi in this instance, as it would strengthen Japanese Prime Minister Shinzo Abe’s argument that Japan’s pacifist constitution must be revised and its army retooled.

The US presence on the Korean peninsula is another matter. China is reportedly suspicious of the ‘missile shield’ the US is installing in South Korea to defend it against a nuclear strike from the North. In China’s view, the US Terminal High Altitude Area Defence (THAAD) system undermines its own nuclear threat, and THAAD’s powerful radar capability enables the US to monitor activity in China.

China is using capital to make its views felt. In early 2016, a Chinese foreign ministry official travelled to Seoul to meet some of South Korea’s biggest investors in China and told them their China business could suffer because of the government’s support for THAAD, according to a report in the Financial Times.4 Ultimately, China’s economic influence, rather than military force, may be the key to defusing the threat posed by Pyongyang.

Cyber security

With uncertainty surrounding relations between the great powers, coupled with the resurgent threat of nuclear war, geopolitics is a more pressing issue for governments than at any time since the Cold War. But in another sense, the relationship between geography and political power has never mattered so little. Cyber attacks can be staged relatively cheaply, which levels the playing field between nations with unmatched economic or military resources.

And in the future, cyber-warfare will not be limited to the release of classified information or the dissemination of propaganda. As countries become ever more reliant on automated transport systems and other high-tech infrastructure, cyber-warfare could have severe consequences in the physical world. Sawers believes it will be important for major economies to develop guidelines as to what is a permissible use of cyber force and what is beyond the pale.

With that in mind, one can envisage a new Yalta-style conference to determine the rules. The negotiations could take place in the neutral territory of a virtual conference room. In place of the soldiers that guarded the Big Three in 1945, Trump, Putin and Xi would be protected by squads of technology boffins, leaving them free to negotiate their cyber-spheres of influence. Plus ça change.

References

1 Donald Trump reiterates he will only help NATO countries that pay “fair share,” The Guardian, July 2016

2 Speech to The German Marshall Fund, September 2008

3 How Rex Tillerson changed his tune on Russia and came to court its rulers, New York Times, December 2016

Important Information

Unless stated otherwise, any sources and opinions expressed are those of Aviva Investors Global Services Limited (Aviva Investors) as at March 8, 2017. This commentary is not an investment recommendation and should not be viewed as such. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Past performance is not a guide to future returns. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested.

RA17/0328/30062017

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